Is a High-Deductible Plan Right for You?

High-deductible health plans can offer significant savings in annual premiums, but they often pose greater limitations than low-deductible plans and are not for everyone.

"Save thousands on health insurance." "Cut your premiums in half." We've all seen the ads for high-deductible health plans (HDHPs), touting their low rates. But do lower rates mean less coverage? And if they are so good, why do so few workers opt for them?

Like traditional health care plans, HDHPs usually cover a wide range of medical and prescription costs -- but only after a steep annual deductible has been paid. Such deductibles can run from as low as $1,150 for individual coverage, to upwards of $7,500 for family coverage, depending upon the plan. These plans seek to drive down health care costs by placing more of the responsibility and cost burden on consumers, in effect, forcing them to be more cost-conscious when deciding on medical care.

HDHPs generally appeal more to healthier people with no chronic ailments that require regular care. That's because high-medical-maintenance individuals are likely to end up burning through the entire deductible, effectively upping the costs above low-deductible plans. For instance, an HDHP with a monthly rate that is $100 less than a low-deductible plan will end up costing more if you end up shelling out over $1,200 before you use up the deductible.

Coupling With a Health Savings Account

HDHPs are often used with Health Savings Accounts (HSAs) -- tax-preferred savings accounts that are used to fund qualified medical expenses. Enrollees or their employers make tax-free contributions to an HSA, then use the funds to purchase medical care until they reach their deductibles.

You are eligible for an HSA if you meet four qualifying criteria: (1) you are enrolled in a qualified HDHP, (2) you are not covered by another disqualifying health plan (whether insurance or an uninsured health plan), (3) you are not eligible for Medicare benefits, and (4) you are not a dependent of another person for tax purposes. You must meet all four of these criteria to qualify.

The maximum contribution to an HSA for 2016 is $3,350 if you have single coverage, or $6,750 if you have family coverage. If you are over age 55 then you can contribute an additional $1,000 in 2016 regardless of whether you have single or family coverage. Such contributions are made on a before-tax basis, meaning they reduce your taxable income. Note that unlike IRAs and certain other tax-deferred investment vehicles, no income limits apply to HSAs.

HSAs offer investment options that differ from plan to plan, depending upon the provider. What's more, HSA account balances carry over from year to year, unlike their predecessors, Medical Savings Accounts (MSAs), which contained a "use it or lose it" feature that severely limited their usefulness for most people. Earnings on HSAs are not subject to income taxes.

Any medical, dental, or ordinary health care expense that would qualify as a tax-deductible item under IRS rules can be covered by an HSA. A doctor's bill, dental procedures, and most prescriptions are examples of covered items. See IRS Publication 502 for a definitive guide of what costs are covered. If funds are withdrawn for any other purpose than qualifying health care expenses, however, you will be required to pay ordinary income taxes on amounts withdrawn plus a 10% additional federal tax.

Questions to Consider Before Choosing an HDHP

Coverage: What types of care are or are not covered? Are prescriptions covered? How about physical therapy? Is there a limit on doctor visits? Is preventive care excluded from the deductible? Coverage will differ from plan to plan. Look for specific options that are applicable to you or your family.

Caps on Coverage: Is there a limit on hospitalization costs or lifetime coverage? Is it high enough to cover costs for unforeseen issues such as a heart attack or treatment for chronic ailments? More serious procedures can cost many thousands and use up a lifetime limit quickly.

Copays: Is there a high copay percentage? What does it apply -- or not apply -- to? The cheapest plans usually have the highest deductible and the largest copay percentage.

HSA Eligibility: Does the plan qualify as an HDHP under IRS rules? The IRS sets limits as to what qualifies as an HDHP. For 2016, a plan can be considered an HDHP only if its deductible is at least $1,300 for a single individual or $2,600 for a family. Make sure to check if an HSA plan option applies.

Selection: How extensive is the preferred provider network? Does it offer adequate selection in your area? What is the coverage for out-of-network providers?

If you're considering a high-deductible plan, talk to your insurance agent or employer health care administrator who can help you select the type of plan that best suits your specific needs. Additional information may also be found at healthcare.gov.

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